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Wednesday, April 30, 2014

MOF And RBI Differs On Causes Of Bad Loans

Reserve Bank of India, Finance Ministry in a war of words over bad loans at public sector banks -ET
MUMBAI: Growing differences between the Reserve Bank of India and government over bad loans at public sector banks have led to a bitter exchange of notes between the banking regulator and the finance ministry that controls state-run lenders. Bad loans at staterun banks have gone up at a brisk pace, unlike their private-sector rivals and foreign banks. The RBI says this was because of reckless lending to corporates, an allegation that has not gone down well with the ministry which says the bank were only following government advice to help boost the economy. 

In a discussion paper, titled 'Management and Governance Issues in Public Sector Banks' and presented to the government in March, the RBI said the sharp rise in bad loans cannot be just because of the downturn in the economy, and blamed what it called sub-optimal credit management among public sector banks for the problem. For public sector banks, the ratio of gross nonperforming assets — bad loans before making any provisions — to total loan book rose from 6.8 per cent in 2009 to 12.1 per cent in 2013. In the same period, the ratio for new private banks fell from 6.6 per cent to 5.3 per cent. Public sector banks control 70% of the market in terms of credit and deposits. 

In its response defending PSU banks, the ministry said most private banks had stopped lending post global financial crisis in 2008 while PSU banks emerged as the only providers of big-ticker loans. It was at the instance of the government that PSU banks provided financial support to the manufacturing and infrastructure companies in order to give a boost to the economy, it said. To sum it up, the ministry said the huge bad loans or nonperforming assets with public sector banks were because they were willing to take the risk to support economic growth. 

The central bank was not convinced. It responded last week maintaining its stand that PSU banks have weak credit management skills. In response to the ministry's defensive letter .

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